Some investors are selling call options to protect some of the gains from the past six weeks. This action is driving down implied volatility.

Today, we saw some significant call-selling on CarMax ( KMX), the nation's largest retailer of used vehicles. Looking at the June 12.5 calls, we see that nearly 11,400 contracts traded in the first three hours of trading Tuesday. The bulk of the volume traded for an average price of $1.30. The current open interest in these calls is 1,584 and volume reached nearly 12,500 by the close.

KMX did not report any significant news today, but on April 2, the car company reported a 2.6 % climb in fourth-quarter earnings to $37.5 million from $21.8 million at the end of its third quarter.

So, what can we say about this type of call activity? One interesting thing is that the calls finished the day down by more than the stock price. The calls dropped 17 cents to close at $1.38 today, while the stock only fell 16 cents. That is an intuitive way to see that the selling of the calls drove down implied volatility.

This call-selling activity does not mean that investors should run right out and sell their shares. But it does demonstrate how some investors are selling call options to protect some of the gains from the past six weeks. In the case of KMX, the shares are up more than 100% from its closing low of $6.23 on Nov. 20. This call sale could be a bet by a long stock holder that the calls will be hard pressed to rally more in the next month and a half.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day.
Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."